For most people, financial planning typically gets put on the back burner until tax season arrives. However, by adopting a year-round tax planning mindset, this becomes a proactive and deliberate strategy.
Those who consistently engage in year-round tax planning are better equipped to comprehend their tax obligations, anticipate any problems, and make wise financial decisions all year long to reduce their tax liability.
In this article, I share insights into the critical components of year-round tax planning that can position you for a stable financial future. My goal is for you to gain the knowledge needed to navigate the tax landscape effectively throughout the entire year.
Tips for Year-Round Tax Planning
Planning for taxes all year long doesn’t have to be as difficult as it might appear. Here are a few simple strategies to cultivate smart year-round tax-planning habits.
Optimize Tax-Advantaged Accounts
Health savings accounts (HSAs), 401(k)/403(b) retirement accounts, Roth IRAs, and traditional IRAs are all efficient, tax-friendly ways to save money for your future and to mitigate taxes. If at all possible, get into the habit of making consistent contributions to these accounts, which can increase your future tax-deferred savings and, if applicable, lower your taxable income.
Work-Related Tax Deductions
By carefully utilizing deductions for work-related expenses, you can drastically lower your tax burden. Keeping detailed records is critical, especially for purchases of necessities, professional development expenses like continuing education courses, and travel between job sites.
Deferring Income
As your income rises throughout your career, deferring part of your increased salary for retirement provides both a current tax deduction and opportunities to increase your savings. An effective strategy is to verify payroll deductions to your 401(k) account to maximize any employer-match contributions, if offered.
Income Acceleration
Think about ways to accelerate or aggregate tax liabilities during lower-income years, such as early retirement or during a job change or layoff. One way to gain from a temporary lower tax bracket situation is to convert conventional IRA accounts, either fully or partially, into after-tax Roth IRAs. This allows for significant tax-free growth of retirement assets.
Required Minimum Distributions
After you turn 73, you must draw required minimum distribution (RMDs) from conventional retirement funds, such as IRAs and 401(k)s. (That RMD age increases to 75 in 2033 under the SECURE 2.0 Act.) Income tax applies to these withdrawals, and there can be severe penalties for skipping them.
In order to properly manage RMDs, you must anticipate how they can affect other income sources and potentially cause increased Medicare premiums or more taxes.
Two tax-efficient ways to lessen the impact of RMD income is converting to a Roth IRA and also allocating unnecessary RMD income to charitable causes, where the charitable deduction balances the taxable distribution.
Tax-Loss Harvesting
Tax-loss harvesting, which involves selling shares at a loss, can be a useful strategy for offsetting capital gains. These losses are partially deductible against other regular income and can be used to offset otherwise taxable investment gains.
To verify that the tax loss is legitimate, it is crucial to understand the wash-sale rule, which prohibits repurchasing substantially similar shares within 30 days of the sale.
Bunching Deductions
A smart year-round tax planning strategy for those looking to optimize their itemized deductions is bunching.
Bunching is combining multiple expenses into a single year, thereby increasing the likelihood that your total itemized deductions exceed the standard deduction amount. This results in a larger deduction against income and more substantial tax savings.
For instance, you may donate $10,000 to your preferred organization in a single year rather than $1,000 annually. This allows you to itemize in that year and possibly increase your deduction.
Bunching can also be used for other expenses, such as medical and business expenses. You can fully gain from this strategy, but be aware that some deduction caps and limitations do exist.
Work With a Specialist to Leverage Year-Round Tax Planning
The more knowledgeable you are about investing and year-round tax planning, the more confident and empowered you can be to take control of your financial future. But it can get complicated trying to do it on your own.
That’s where we come in. Prosperity Financial Solutions is fully committed to helping clients in and around the Palm Beach, Florida, area navigate the complexities to take advantage of year-round tax planning.
To get in touch, call (561) 207-6213, email ramsden@brookstoneadvisor.com, or book a 30-minute complimentary call online.
About David
David Wilcox is president and cofounder of Prosperity Financial Solutions, a financial services firm, based in Palm Beach Gardens, FL, specializing in retirement planning, estate planning, and investments. Since 1987, David has been assisting pre-retirees, retirees, and investors with comprehensive retirement planning, helping them preserve their wealth, increase their retirement income, and avoid common financial mistakes. Prioritizing financial education, he employs strategies to instill confidence and comfort in his clients as they make decisions and move toward their ideal financial future. He also highly values building relationships with clients and strives to make them feel like part of his family.
David holds an associate’s degree from Broward College, a bachelor’s degree from Florida State University, as well as the Life Underwriter Training Council Fellow (LUTCF®) and Long-Term Care (CLTC®) certifications. A firm believer in professional education and participation, he is a member of the Global Financial Association, a member of NAIFA (National Association of Insurance and Financial Advisors), and is a Certified National Long-Term Care instructor. Teaching and mentoring other financial advisors, David presents dozens of seminars and workshops on long-term care and investment planning throughout the country. Outside of the office, family man David enjoys golfing, fitness, and spending time with his kids on the boat, going for long walks, and traveling to new places. He wants to provide a positive example for his children and show them that it’s never too late to follow your dreams. To learn more about David, connect with him on LinkedIn.
Investment advisory services offered through Brookstone Capital Management, LLC (BCM). a registered investment advisor. BCM and Prosperity Financial Solutions are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.